I
am almost prepared to start listing more of my commercial banking
shorts, but before I do I want to delve even further into the
educational realm so there is no doubt as to why I am as bearish as I
am. For those who can't wait to see my ultimate shorts, I will give you
the complete list of what I call the "Deep Doo-Doo Banks". These are
the banks that are steeped pretty deep in it. Are you ready? Can you
handle the pressure? Okay, here we go!

Before we focus on which banks I am shorting, let's explore the
current banking environment. I aimed my team at banks that have high
concentrations in risky products, risky geographic areas and low
tangible and regulatory capital. There were a lot to choose from. So,
to narrow down the list, I had everybody enter the 12 step program -
after reading my tutorials above, of course.

2nd lien products in high LTV states that have rapidly declining
housing values proffer the opportunity for 100% losses with no
recoveries.

Above is a list of states and the home equity and 2nd lien defaults
for said states. For those who don't know, 2nd lien loans (of which
include HELOCS, piggy backs, home equity loans, etc.) are 2nd in line
when it comes to liquidation rights under foreclosure. If the loan was
made with a high LTV (let's say 90% combined LTV, with the first loan
made at 85% LTV), in an area that has even a modest (these days,
anyway) decline in value of 10% year over year, then you effectively
have a 100% loan with not equity. Every dollar after this that the
house drops is a permanent loss from the bank's loan. Factor in the
costs of deed transfer, mortgage tax, utilities, upkeep, brokers
commissions and legal fees (about 7.5%), and the bank now get's
nothing, even if it can move at auction. When I say nothing, I mean
nothing. Not just an NPA on its books, but absolutely not way to
recover any value from the home. I can hear the blog readers now
saying, "Well, what are the chances of that happening?". Stay tuned,
and we will assuredely find out.

HELOC portfolio exposures with high average LTVs that increase the risk of the whole portfolio

HELOC portfolio exposures with full 100% LTVs or close to it consisting of a very large portion of the total portfolio

HELOC exposures with very high, but not quite 90% LTVs consisting of a large portion of the total portfolio

For those that really wondered whether the scenario that I outline
above could really take place - well, wonder no more! We have a whole
smorgasbord of banks in that position. The key is, which of these bank
have loans in the aforementioned areas detailed in the first graph. I
know you know that I know the answer to that question. I'm even going
to tell you for free, but before we go there let's cover some
additional background material. I want you to pay particularly close
attention to who is leading the pack in high LTV concentrations. I was
short this bank and WaMu since last year, and have since covered both
short positions in the single digits are close to it. As a rule, I
rarely ride a stock past $10 on the way down because zero is but so far
away and the risk/reward ration is rarely justifiable (the two monolines that I have covered in detail
are an exception to this rule). In this case, I covered both too early,
particularly Countrywide. The moral to the story here is that many of
these banks are not too far behind Countrywide, with the largest
difference between CFC and them being CFC's piss poor public relations
ability. WaMu is right there too, as well as some big name banks with
some big name investors behind them. I will end my bank series with a
full scale forensic report of my number one short in the sector and I
am sure it will shock many of you who like to buy into brand names.

In order to determine how likely the aforementioned event
is, let's create a metric by which Reggie Middleton measures risk. This metric
will be units of risky or non-performing assets as a percentage of statutory
equity. This, of course, can be refined by removing goodwill, Bullsh1t, and the
various accounting pollutants to plain old economic earnings, but less just
start with this. When applying Reggie's Risk Metric to the graphs above, we can identify more banks.

Looking at risk from this perspective, we not only see who has no
clothes on when the tide goes out, but also how well (un)endowed they
are in addition.

Please keep in mind that some
loans and banking products are much riskier than others. Due to this, I have
culled what I believe to be the riskiest products to short list the banks. We
have already addressed 2nd
lien loans. There is also construction
and development (C&D) loans that are still on the books that are by
far,
much riskier than the conventional commercial loans - which are risky
assets themselves in this environment. An off the cuff, anecdotal
assumption would be that 20% of these loans will be in default in many
areas,
with greater numbers the newer the vintage. For a category such as high
rise
condos, they are usually 24 month, interest only, 20-30 year
amortization. The
intent is to have them refinanced into permanent loans upon
construction
completion, which is difficult for projects such as condos.
Construction costs
have spiked, supply is up and demand is down. Those banks with high LTV
C&D
loans (ex. Corus Bank) and any 2nd lien loans over 90 LTV should be high on the short
list.

One to four family properties are also quite risky, for amateur
(and not so amateur, actually) investors bought buildings without a firm (or
even loose) understanding of cash flows, cap rates, and rental yields - aided and
abetted by the banks which apparently missed out on the cash flow valuation
memo as well. Well, those who overshot the predictions of rent rolls, undershot
the estimation of expenses, or took out volatile ARM products ended up not only
underwater, but with negative cash flow as well. It is much easier to walk away
from an investment property than it is to do so from your home. As you can see
from the graph below, my assertions seem to be ringing true. The rate of change
in delinquencies in these are SKYROCKETING!

I am going to cut this short here, and will continue this series in 24
hours or so. I have quite a bit of information, so the series will be
at least 4 or 5 additional parts. I also need to post my homebuilder
updates (remember I broke the secret on the industry's secretive JV accounting)
and Muni default ->CDS failure connection research as well. So much
to do, so little time. I do hope you guys appreciate this, for I don't
know where else to find it on the net. As if this disclaimer is
necessary: I am short, or in the process of accumulating bearish
positions in most if not all of the companies detailed in this article.

Follow Reggie Middleton and get email alerts

Live Chat

+

Live Chat

-

We apologize for the inconvenience.

The chat platform is currently undergoing maintenance.

To see the chat, try to refresh in about 5-10 minutes.

Chat is not supported in your browser version.

Please upgrade your browser or use a different browser, such as Google Chrome.